By Oil prices eased somewhat on Tuesday, but stayed near multi-month highs as risks to supply remained.
Brent crude oil prices had hit a five-month high on Monday after the US Treasury imposed fresh sanctions on the Russian shadow fleet last week.
At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $77.18 per barrel, down 0.2%. Brent crude oil on the Intercontinental Exchange was at $80.75 per barrel, up 0.3% from the previous close.
Prices had fallen slightly from the Monday’s close as traders resorted to booking profits.
US sanctions hit Russian oil
On Friday, the US Treasury sanctioned Russian oil-producing giants Gazprom Neft and Surgutneftegaz, while also imposing sanctions on insurers Ingosstrakh and Alfastrakhovanie Group.
The US had also sanctioned 183 vessels, transporting Russian oil and are part of the country’s shadow fleet.
The US Treasury also prohibited US petroleum service companies from operating in Russia.
This prohibition takes effect from 27 February 2025.
These sanctions came into effect on Friday, while energy markets were already on the upside as exports from Russia and Iran had fallen in December.
Surplus may reduce
The International Energy Agency had estimated that the global crude oil surplus in 2025 would be around 950,000 barrels per day.
Demand is likely to remain subdued as China continues to struggle with its economy.
However, the recent sanctions on Russian oil have changed the scenario somewhat.
“A large portion of Russia’s shadow tanker fleet has been sanctioned, making it more difficult for Russia and buyers to circumvent the G-7 price cap,” analysts at ING Group, said.
These sanctions have the potential to take as much as 700k b/d (700,000 barrels per day) of supply off the market, which would erase the surplus that we are expecting for this year.
This would nearly wipe out the supply overhang that had been predicted this year.
Relief for OPEC+
The current scenario also augurs well for the Organization of the Petroleum Exporting Countries and allies.
If the supply overhang reduces, it presents OPEC with more room to unwind some of its steep voluntary production cuts in the coming months.
The cartel had agreed to extend its voluntary output cuts of 2.2 million barrels per day till the end of March. It is expected to increase production from April.
Less Russian barrels available to the market could provide more wiggle room to OPEC.
However, this will also depend on how the demand situation plays out in China, the world’s largest importer of oil.
If oil demand continues to disappoint, increasing production would be more challenging for OPEC from April.
Trade data from China on Monday showed that crude oil imports in December averaged 11.31 million barrels per day, down 4.6% month-on-month and 1.1% lower year-on-year.
“This leaves total crude oil imports over 2024 1.9% lower YoY. This is only the third time since 2010 that China has seen annual crude oil imports fall YoY. The other two times were in 2021 and 2022,” according to ING Group.
Actual supply loss could be less
Although the fresh sanctions on the shadow fleet of Russia have the potential to wipe out a significant amount of oil from the market, the actual figure could be lower.
ING analysts said:
The actual reduction in flows will likely be less, as Russia and buyers find ways around these sanctions – clearly there will be more strain on non-sanctioned vessels within the shadow fleet.
Russia had been successful in evading western sanctions and the $60 per barrel price cap since 2022.
Experts believe that the country would do everything to minimise the impact of the new sanctions.
Russian crude oil had been majorly bought by the likes of India and China in the last three years.
In December, Russian imports to India fell to a 17-month low, while shipments from the Middle East rose on a month-on-month basis.
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